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The real estate market supporting brick-and-mortar retailers must adjust to survive
the threat posed by a sharp rise in spending on Amazon.com Inc. and other e-commerce
sites, bankruptcy attorneys have told Bloomberg BNA.

Some major mid-market retailers are on a death watch, one attorney told Bloomberg
BNA. And to adapt to changing market forces, these attorneys suggested strategies
that commercial real estate owners are using or could use.

Online Growth, More Retailers Filing

There has been astronomical growth in online e-commerce in recent years, led by Amazon
shopping.

Although these amounts reflect less than 10 percent of the total retail sales nationally,
the transformation in consumer purchasing preferences has had a profound effect on
brick-and-mortar retailers, including chains.

Big names, like HH Gregg, Gymboree, Payless Shoes, Radio Shack, Gander Mountain, Golfsmith,
True Religion Apparel, Eastern Outfitters, and American Apparel, all filed for bankruptcy
in the past year alone. Other brands, like Macy’s Inc. and Sears Holdings Corp., also
are contracting.

Total store closings
could exceed 8,000 this year, Credit Suisse Group AG analyst Christian Buss estimated, according to a Bloomberg
report Aug. 16.

Even the behemoth Walmart is blinking under the glare of Amazon’s popularity and scrambling
to find its place in the online marketplace, Victor Sahn told Bloomberg BNA. Sahn
is a partner at Sulmeyer Kupetz, a Los Angeles firm specializing in bankruptcy and
insolvency law.

On Aug. 16, President Donald Trump broadcast his own opinion on the
effect of Amazon on Twitter: “Amazon is doing great damage to tax paying retailers. Towns, cities, and states
throughout the U.S. are being hurt - many jobs being lost!” he tweeted.

Malls Getting Hit

“There’s going to be a lot of wreckage,”
Donald L. Gaffney told Bloomberg BNA. Gaffney is a partner at Snell &
Wilmer, Phoenix, and is the leader of the firm’s bankruptcy and reorganization practice
group.

Gaffney was referring specifically to mid-level markets and stores that cater to them.

“Sears and JC Penney are on a death watch,”
he said. And these retail giants anchor many of the country’s mall spaces. Consider
how many Macy’s stores have closed, Gaffney said.

In January, Macy’s announced its intent to close 68 stores, and in February they announced
another 34 closings.

We’re seeing a “hollowing out of the core of retail,” Gaffney said. “You have to have
a unique brand draw to survive.”

Malls Face Other Problems

For example, Sahn says, outlet malls continue to grow, allowing more manufacturers
or brands to bypass department stores and reach the buying public directly.

A lot of malls are giving up even without a fight, declining to file for bankruptcy
protection because of financing arrangements such as “bad boy guaranties,” Gaffney
said.

Under these “bad boy” deals, shopping centers will take out non-recourse loans supported
by insider guaranties that will take effect only if the borrower damages or impairs
the collateral or interferes with the lender’s foreclosure or collection efforts,
Gaffney explained.

The arrangement creates an incentive to keep borrowers out of bankruptcy. Gaffney
said these kinds of deals are especially common in the Northwest, where more and more
borrowers are simply turning over the keys to their retail mall space, rather than
trying to reorganize.

Repurpose

Malls are going to need to shrink or repurpose for other uses, Sahn said. He said
they’re going to have to focus on “right-sizing their footprints.”

Gaffney agreed. Many malls are closing up commercial space and building condominiums
or apartments, he said. Others are building out sports or exercise facilities, spaces
designed to draw visitors but not dependent on retail sales. Still others are trying
to appeal to families by building playgrounds or similar attractions.

GGP, a REIT focused on owning high-quality retail space across the U.S., according
to its website, expounded on such uses on its second quarter earnings conference call.

According to Jeffrey Langbaum, Bloomberg Intelligence, the company will seek to increase
its cash flow and value by converting spaces for apartment, condo, office, hotel,
data center, fitness and last-mile delivery uses.

Some malls are considering restructuring their spaces to replicate town squares, with
living and office spaces and restaurants, and cinemas—again, breaking away from reliance
on retail,
according to a Bloomberg report.

Gaffney said Colorado is one state seeing creative repurposing of mall space, as marijuana
growers are taking over spaces to feed that state’s new, perhaps controversial, market
of legal marijuana.

Surrender to the Tide

Although he expects to see more mall spaces fail in the near future, Gaffney doesn’t
expect these failures to lead to more work for lawyers.

“We’re seeing more and more a surrender to the tide,” with real estate owners simply
giving up rather than fighting to stay alive in this increasingly difficult retail
climate, he said.

Amazon is building and hiring aggressively and doesn’t look to be slowing down, and
it’s leading the way for other online retail companies.

To contact the reporter on this story: Daniel Gill in Washington at
dgill@bna.com

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